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Where Auto Funds Should Go

If the government intends to stimulate demand within the auto sector, it should better provide buyers with subsidies and loans instead of funding the automakers, said economist Saeed Laylaz.
Pointing to the letter signed by the ministers of economy, industries, labor and defense, which was addressed to President Hassan Rouhani, Laylaz said these officials have warned about the recession in the auto industry, which shows that the industry is hanging by a thread, Eghtesad News reported.
Disclosed early in October, the letter openly censured “the discord within the policymaking state bodies” and called for a prompt decision to address problems plaguing the capital market.
Iran's economy is facing stagflation, Laylaz said, for the first time, such that people have lost their purchasing power and prices have increased which, in turn, reduced demand.
"Many Iranians are not even able to afford the bare necessities and must scrape by," he said, adding that this is particularly true with the seven lowest deciles in terms of income.
"Iranians are buying less dairy products and bread; they cannot afford to purchase formula milk for their babies and even electricity and diesel consumption levels have dropped. Naturally, in such a situation, demand for cars will also drop."
A look into Iran's monetary and financial policies during the past years shows that liquidity headed toward consumption rather than production, which also contributed to stagflation. The economist noted that Russia and Venezuela, which are led by populist parties, dominated by an oil-based economy and challenges global systems, have a malignant economy.
Laylaz said he does not favor giving loans to the auto sector because, instead of being used for renovation of infrastructures and development, these will be wasted.
"It would be better if the government uses the funds in more structural areas such as construction projects," he said.
"If a construction projects are suspended, they will cause inflation. However, once they become operational, inflation will decline and have a positive impact on other sectors, including the auto industry."
Laylaz further said that with the development of construction sector, transportation will also exit recession and this will have a direct impact on the car market, "especially medium and heavy-weight commercial vehicles."
He suggested that to fight recession, Iranian carmakers must restructure management methods and improve their banking operations.
"With the help of the government, they should lease cars to customers through well-planned schemes. This method has globally proved successful when the auto market is stagnant," he said.
"Increasing auto loan ceilings for customers could be effective. This should be provided to customers in the form of coupons rather than cash, as loans will not boost production or public demand for cars since the money can be used for other purposes."
Nevertheless, the economist believes this will only leave a slight effect on the auto market, as this sector is very large and cannot be saved with one method alone. He is of the opinion that "reducing car prices should also be avoided, for it will only result in greater loss".
"By reducing car prices, the expenses incurred by automakers—not including the wages of workers and purchases of complete knocked-down kits—will be more than what they make from sales.
"If that were to happen, it would be more logical to shut down the entire industry, before they incur such a hefty loss," he said.
Laylaz clarified that production and financial cost should be reduced instead of the price of end product. Iran's automotive industry has been stuck in a market glut for the past 12 months due to sluggish demand and an increase in the price of imported parts.
The country's second largest automaker SAIPA has begun to reduce its research and development budget and plans to jointly produce Chinese CKD vehicles.